After June 17, 2012, Greece will have two choices. First, continue with Euro currency and be a part of Euro zone. Second, separate from Euro zone and introduce its own currency ‘drachma’.
Whether Greece stays in EU or leaves EU, Indian financial market will follow global sentiments. Based on this study one can say that Global and Indian financial markets will see little progress, until there are other external factors in India like, Inflation, GDP figures, fiscal deficit etc.
At this stage 70% suggest that Greece would remain in Euro Zone. Even The U.S.A. president and IMF chief want Greece in Euro Zone.
Why countries and global leaders want to save Greece through bailouts or liquidity injection, even after world is aware about Greece’s debt and possible default risk on it?
Greece’s economic crisis turned into fully political crisis. If Syriza party comes in power (which has high possibility in June re-election), would cancel bailout deal. And Europe and IMF will stop loans to Greece. By this Greece would be no longer able to pay wages, pensions, essential services etc and probably run out of cash in July. And Greece will default on debts.
If Greece leave Euro Zone then country will introduce new currency, drachma. And drachma would depreciate by 50% -70% with compare to Euro. And Greece government bonds will be worthless, which are highly exposed by German and French banks.
Greece exit from Euro Zone would not create direct impact on Indian financial markets but indirect effect would repeat 2008 crisis scenario. In case of direct impact, Indian has 0.14% of total export to Greece, which is negligible. But if Greece default and decides to exit Euro, then global crises is imminent.
India’s exports growths are linked with global growth. India has great exposure in Europe market. March 2011, total exports to The U.S.A. were 10% and to Europe were 18% of the total. This indirect effect would make India and Europe trade suffer. EU imports from India, Manufactured Goods: 9,572 million euro, Machinery and Transport equipments: 7,004 million euro, Textile and related articles: 7,326 million euro, Clothing: 5,131 million euro. These are the major imports of EU from India, and these sectors would have more impact.
Euro is known as second largest currency reserves in world after The U.S.A. dollar. Greece crisis is depreciating Euro as well. This will devalue commodities, like Gold, Silver, Crude oil etc on commodity exchanges around the world.
This Euro and Greece crisis will make The U.S.A. dollar the safest haven and investors will lure towards that. By this Indian rupee will depreciate more, and would result in inflation, fiscal deficit rise. In this macro concern and domestic factors, FIIs will lose confidence in Indian market, and would further make Indian secondary market more volatile. Even in last three years EU’s FDI with Indian has also shown negative results too, In 2009 and 2010 outflow was 3.3 billion euro and 4.7 billion euro respectively, where inflows in same years were 0.8 billion euro and 0.5 billion euro respectively.
This will also cost high to Indian banks and corporate to raise funds from foreign countries. And this will result in low growth and profit to Indian banks and corporate.
Along with this Indian IT sector has 20% - 30% earnings from European countries, this will drag down Indian IT business.